With the help of his uncle and friends, Napster was founded in 1999 as a peer-to-peer music file sharing service by 18-year-old Shawn Fanning. Napster did not store the music itself in its servers, but provided an index to files in other people's computers. More than 60 million users took advantage of the service, and it quickly became one of the most controversial ventures on the Web, because much of the music being shared was copyrighted material.

The music industry sued the company, claiming losses of millions in royalties. Napster lost the case in 2000 and was about to be shut down, except for a last minute stay from the Circuit Court of Appeals. Subsequently, Napster and Bertelsmann, parent of BMG music, agreed to partner so that Napster could be developed into a paid subscription service that would monitor transfers and pay royalties to the copyright holders.